Wednesday, 30 May 2012

Spanish Banking (1)

From here on the
banks of the river Minho, I cannot help but get the impression that you world
citizens out there are somewhat baffled by the situation of the Spanish
financial system. So – noblesse oblige!
- I ought to give you my take on it, were it not that – expert as Al Mittington
may be in innumerable fields of human knowledge – he is (i.e. I am) no less
baffled by it, dear reader. Nonetheless, let me give it some try, making use of
my one advantage: I live across the road from the place…

The original problem
of the Spanish banking system is not too difficult to grasp. It roughly goes
like this. Spain entered the European Union in the early 80s, after a 40-year
autocracy which had kept its development dismally low. The huge potential for
growth, plus generous EU subsidies, generated a vital, booming young economy in
the 80s and 90s. This was fine and deserved. Unfortunately, due to a
psychological peculiarity in the Mediterranean mind, the sector that grew and flourished
most was not industry or services or IT, but construction (known in Spain as ‘ladrillo’, or ‘brick’). Cheap housing, tourist hotels, office
towers and utility buildings sprang up like mushrooms with a vengeance and a
submachine gun. By the mid and late nineties, this original success story was
pushed over the edge of wisdom and sustainability by the arrival of two new
factors: deregulation and the Euro. The first made sure that developers could
start pharaonic projects even easier than before, and that banks could take
greater financial risks. The Euro, for its part, lowered Spanish interest rates
to German levels, since the ECB rather predictably set policy which was good
for its most successful participant, the Bundesrepublik.

The result was
that an initial success story turned into a humongous bubble. Developers could
not gobble up fast enough the cheap and easy credit that the banks were willing
and allowed to hand out. Private citizens borrowed to their heart’s delight,
buying houses way beyond their means, often taking out mortgages (which the
banks gladly provided) which covered 100 % of the real estate price, reserves
for its renovation, funds for furniture and fixtures, a neat sum for a new
flashy car and – no I am not making this up! – an extra few thousand for mama’s
mammal enlargement. Additionally, very average middle class families – rather
than buying stock or putting their wealth away in saving accounts which yielded
little interest - began to invest in speculative house-buying. They would
inscribe for new, still-to-be-built apartments, paying for their acquisition through
cheap credit and at the price level of year N, with the object of selling the
property, once finished, in year N+4 for the risen price of that year (real
estate prices understandably rose much faster than inflation under pressure of
the ever growing demand). The proceeds from these profitable operations – say
25 % - were then ploughed back again into the next endeavour. An additional
factor which drove the price level up was the arrival of foreign buyers, from
such cold places like England, Germany, France and Holland – looking for
holiday homes on the sunny Spanish coasts.

It was a bubble,
but who was going to stop it? Even those who understood that such an upsurge
could not go on forever (and believe me: there were many simpletons and supposed
experts who claimed that the market would never come down again!) could barely
bring themselves to do so. The national governments (of both left-wing and
right-wing vintage) reaped huge profits in taxes direct and indirect, which
enabled them to please their voters and their citizens. What is more: the
booming bubble created jobs… So very many jobs that Spain could ever absorb
three or four million foreign workers, largely from Latin America and the
Maghreb. GNP surged as the bubble grew, which brought the further delight of
making Spain more important on the international scene (who of us does not
remember PM Zapatero – that student leader playing at elder statesman - claiming
triumphantly that Spain had surpassed Italy in GNP, was now the 8th
economic power on the globe, and would soon overtake France!?) The same sort of
blind, flight-forward attitude reigned supreme in the governments of the
Autonomous Provinces, while on a municipal level mayors and aldermen – even the
incorrupt - were happy to play along,
since selling off low yield agricultural soil to developers for a high price
was just about their only substantial source of income. Etcetera etcetera.
Everybody was a believer, and everybody in the end discovered that the deities
they had worshipped and obeyed were but hollow statues cast in plaster…

In 2008 Lehmann
Bros. tumbled and the domino effect started. Northern banks with lots of
investments in the States ran into trouble and had to be bailed out. The
European economy hit a slump, which translated immediately into the so-called
Sovereign Debt Crisis. That is to say: the crisis slowed down southern
economies that had borrowed far too much because the Euro interest rate was far
too low in comparison with their productivity. Consequently southern governments
suddenly found themselves owing debts they could not possibly repay. Their net income
went down as their interest rates went up. An evil spiral had set in, more
particularly because the most effective time-proven method to take the pressure
off the kettle – devaluation of the national currency (effectively lowering
salaries and export prices in a single sweep) – was no longer available to the
individual Euro countries. Debt crisis was thus added to economic crisis. And
that is where we still are today.

Enough for
today. Tomorrow we will take a look at the Spanish banks that stir up such
fears at the moment.

3 comments:

Great post. Thanks for the clarity. It sounds like most people were living in a dream for a long time. Perhaps their only problem was that they believed their own lies - or maybe "lies" is harsh. But they seemed to be genuinely deluded in their beliefs - however innocent or sinister they may have been. Such a pity though, it was always a dream of mine to live in Spain. It doesn't look like that will happen anytime soon.

Thank you for your friendly reaction. It is always a great pleasure to please one’s readers.

Indeed the Spaniards lived in a dream the last 20 years, but who can blame them? Pretty much everybody – the government, the media, the banks, their employers and last but not least: their neighbours – told them that the gravy train would never stop running. So they took the bait, and now they are dangling on the hook, gasping for air. Some of the things one sees are truly heart-breaking. But – since you live in the RSA - I do not need to tell you what poverty looks like.

Speaking about dreams: please do not let me shatter yours. Spain is still a fine country to live in, especially if one has some income from elsewhere. In fact, this would be the time to pick up reasonably priced property. Do, however, heed Colin Davies’s warnings as to the workings of the real estate market, and do the smart thing: before you burn your bridges behind you, come stay here for a year or so first, to see if you really like it. Roughly half the expats who settle here return home again in desperation within the year. Spain, after all, is different; also quite different from the rosy picture you may imagine.

Finally: allow me to take this occasion to compliment you on your own blog. I regularly read it and I am often impressed with your marvellous way with words.

Thank you for your reply and your kind words. I like to take a realistic view in most things, and that is why I enjoy these political commentary blogs... it helps keep things in perspective.

That said, I have a somewhat realistic view of Spain too. I know about the political and cultural turmoil and how many expats are faced with regular bouts of racism and xenophobia. In fact, reading up on Spain in detail has reminded me a lot of South Africa - we share many of the ideals and challenges that Spain has at the moment.

My objectives are also somewhat different than the average expat. I'm looking for a simpler lifestyle - more quality, less quantity. I have long since become dissatisfied with corporate bureaucracy and the rat race and such (yes I sound so old, although I'm only 30). So I'm still young-ish, or so they tell me, and I have nothing tying me down to any particular place. No commitments whatsoever (maybe I should be sad about that, but I'm a gypsy at heart Mr. Mittington).

I'm aware of other challenges living in a foreign land - language barriers, cultural barriers, loneliness etc. and yet it still doesn't seem like enough to dissuade me otherwise. The only thing that keeps me from jumping on the next plane, is the lack of employment.